CASE AND COM M ENT 15

S H IP O W N E R S ’ IM P L IE D IN D E M N IT Y F O R C A R G O C L A IM S

The Island Archon

A shipowner wishing to reclaim losses from a time charterer may choose to base its claim
on an indemnity against the consequences of obeying the charterer’s orders. The
advantage of an indemnity claim is that it operates independently of any breach by the
charterer. The disadvantages are the paucity of reported decisions where an indemnity-
based claim has succeeded and the lack of any direct authority that such an indemnity will
be implied. However, in the recent decision of the Court of Appeal in The Island A rchon1
such a claim not only succeeded, but did so on the basis of an implied indemnity. This note
will examine the implications of the decision, particularly as they affect the adjustment of
cargo claims as between shipowners and time charterers.

The facts
In The Island Archon the vessel was trading under a three-year charter concluded on 30
March 1979. During the currency of the charter, the shipowners were compelled to settle
spurious cargo claims brought against them in the Iraqi courts in respect o f cargo
discharged in Iraq. From about June 1980 the position in Iraq had been such that any cargo
discharge would result in the issue of Port Authority certificates noting damage or
shortlanding, irrespective of the true state of affairs (“ the Iraqi system ”). The local courts
would then invariably give judgment against the shipowners on the basis of these spurious
certificates. The shipowners sought to recover the payments made pursuant to these claims
from the time charterers. As there had been no breach of charter, the charterers’ orders that
the vessel proceed to Iraqi ports being lawful, they made their claim on the basis of an
indemnity; in the absence of an express indemnity in the charter, they claimed that one
should be implied.2

The law
Although there was no direct authority on the point, Evans, L.J., who gave the leading
judgment, referred to a long-held general belief among maritime lawyers and arbitrators
that such an implied indemnity did exist. He was prepared to go along with such a
“reasonable” belief and imply such an indemnity on the basis that this is a reasonable quid
pro quo for the shipowner in return for granting the charterer a wide power of selection
as regards ports and cargoes. He then proceeded to look at the authorities on express
indemnities for guidance as to how the implied indemnity should be applied. He first
looked at those cases where the shipowner had claimed an indemnity as against the
consequences of obeying the lawful orders of time charterers as regards the cargo to be
carried. In particular, he examined the decision of Mustill, J., in The Athanasia Comninos

1. T ria d Ship p in g Co. v. S te lla r C h a rterin g & B ro k era g e Inc. ( The Is la n d A rc h o n ) [1994] 2 L lo y d ’s R ep.
227.
2. N o claim w as m ade un d er any im p lied ind em n ity ag ain st the c o n se q u e n ce s o f the m a ster sig n in g the bills
o f lad in g p resen ted by the charterers; p re su m ab ly b ecau se the loss a ro se n o t out o f the lia b ilities im p o se d u n d e r
th e b ills th em selv es but d u e to the ad ju d icatio n o f such liab ilities by the Iraqi c o u rts on the b asis o f sp u rio u s Port
A u th o rity certificates.

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 16 L L O Y D ’S M A R I T I M E A N D C O M M E R C I A L L A W Q U A R T E R L Y

and Georges C. Lemos,3 where, following damage to a vessel from an unexplained

explosion of the cargo of coal being carried, the shipowners were entitled to recover from
the time charterers on the basis of an implied indemnity. Mustill, J., analysed the causal
link between the orders and the loss sustained by the shipowners that was necessary to
found such a claim as follows.4
It seems to one perfectly possible to have a loss which is caused by the shipment o f a cargo having
certain properties, even if the properties of the cargo in question are no different from those of other
cargoes of the same description. In the present case, if one asks the question (eliminating the
possibility of fault on the part of the shipowner) “W hy was there an explosion?” the answer
is— “ Because the Time Charterers called on the vessel to load coal” . This answer is in my opinion
sufficient to found an indemnity without proof that the coal was in any way unusual.

Evans, L.J., rejected this purely causative approach.5 For an indemnity claim to succeed
two further requirements had to be satisfied.
First, the loss may be regarded as caused in law by some subsequent or intervening event. An act
of negligence may often, but not invariably, break the chain o f causation in this sense: . . . Secondly,
the loss although a consequence “ in a broad sense” . . . may have arisen from a risk which the
shipowner has agreed to run, hence the exclusion o f navigation risks and also the distinction which
has been held to exist between time and voyage charter-parties.

He then went on to uphold the finding of the arbitrators that the shipowners’ loss was
directly caused by the chatterer’s orders to proceed to Iraq and were subject to neither of
the above qualifications. O f particular significance was the fact that the “Iraqi system ” had
not been in force at the time that charterparty was concluded, although it had come into
force by June 1980, when the time charterers ordered the vessel to proceed to Iraq. The
shipowners could not, therefore, be said to have undertaken the risks inherent in trading
to such ports at the time the charter was concluded.

The implications of the decision

The Court of Appeal’s readiness to imply an indemnity in time charters seems at first
glance to give an additional advantage to shipowners in the process of apportioning cargo
claims arising under time charters. But just how useful will such an indemnity be? Two
situations need to be contrasted. The first is where the cause of the cargo damage can be
established. If so, it will either be due to the breach of one or other of the parties to the
charter or else it will be due to the intervention of third parties, such as the Iraqi Port
Authority and courts in The Island Archon. In the former instance the indemnity will be
irrelevant. Either the claims will be due to a breach by the charterer or due to a breach by
the shipowner, in which case the chain of causation necessary to found an indemnity will
be broken. Only in the latter instance will the shipowner need to and be able to mount a
successful claim under the indemnity. To do so it will have to prove that the third party

3. (1 9 7 9 ) [1990] 1 L lo y d ’s R ep. 277.

4. Ib id ., 296.
5. A t p. 236. T h is g o es ag ain st the ap p ro ach o f D o n a ld so n , J., in T he E v a g g e lo s Th [1971] 2 L lo y d ’s R ep.
2 0 0 , w h ere he ad o p ted a pu rely c au sa tiv e ap p ro ach to the app licatio n o f the indem nity in a safe p o rt c ase, albeit
on the b asis th at the safe port w arran ty c o v ered only the initial nom ination.

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 CASE AND COM M ENT 17

intervention was of a type not contemplated by the parties at the conclusion of the
charterparty.
The second situation concerns cargo claims whose cause cannot be established.
Applying the purely causative approach adopted in The Georges C. Lemos, the risk of
unexplained cargo claims would fall on the charterer. However, applying Island Archon,
the risk of such claims must fall on the shipowner. If these claims cannot be explained, the
shipowner will, ex hypothesi, be unable to establish that they were caused by the
unforeseen circumstance that is now an essential element of an indemnity claim.
Although the Court of Appeal’s clarification of the indemnity test is to be welcomed,
its application still gives rise to some problems. First, there is the general factual problem
of deciding just what circumstances are sufficiently unusual for the purposes o f founding
the indemnity. In this context, it is instructive to compare The Island Archon with The
White Rose,6 where the shipowners failed in their indemnity claim in respect o f the strict
liability to which Minnesota law exposed them in respect of injuries to stevedores working
on board the vessel. The dividing line between the facts of the two cases is a fine one
indeed.
Secondly, what happens where the unusual circumstances at the nominated port arise
only after charterers have given their orders? On the facts of The Island Archon the
shipowner’s indemnity claim would probably still have succeeded. The order to proceed
to the port would still have been the direct cause of the loss and the “ Iraqi system” would
still have been an equally unusual circumstance. This result seems particularly harsh on
charterers but is an inevitable consequence of allowing indemnity claims to succeed in the
absence of fault on the part of charterers. It is worth noting that in The White Rose
Donaldson, J., was not prepared to allow a claim against charterers on the basis of an
indemnity, in the absence of any fault on their part. The only way in which he could
contemplate a successful recovery by the shipowners would be by their establishing that
the local law was so unusual as to constitute “ legal unsafety” , so placing the charterers in
breach of the safe port warranty. On this basis the change in circumstances after the giving
of the order would be covered by the secondary duty of renomination. If this were no
longer practicable, as would be the case once bills of lading had been issued, no liability
would attach to charterers. However, applying the Island Archon test, the shipowners
would still be able to make a recovery under the indemnity in these changed
circumstances.
Thirdly, there is the problem of deciding when the indemnity is excluded by specific
clauses in the charter dealing with the apportionment of cargo claims. If the Inter-Club
Agreement (the “ICA ”) had been incorporated in The Island Archon, the result should still
have been the same, as the actual cause of the cargo claims was not a cause referred to in
the agreement. However, supposing the loss had been due to unseaworthiness, would the
application of the ICA be ousted by the indemnity if the cargo carried were an unusual,
albeit permitted, cargo? The decision of Hobhouse, J., in The Benlawers7 suggest that this
might well be the case. In holding that the shipowners could not claim an indemnity and
were obliged to settle cargo claims in accordance with the terms of the ICA, he pointed
to the arbitrators’ finding that the cargo was not an unusual one.

6. A /B H elsin g fo rs S tea m sh ip Co. v. R e d e ria ktie b o la g e t R e x (T he W hite R ose) [1969] 2 L lo y d ’s R ep. 52,
59.
7. B en L in e S te a m ers Ltd. v. Pacific S team N a vig a tio n Co. (T he B e n la w e rs) [1989] 2 L lo y d ’s R ep. 51, 61.

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 18 LLO Y D 'S M A R IT IM E AND C O M M E R C IA L LAW QUARTERLY

Finally, there is the uncertainty arising out o f the situations in w hich an indem nity will
be implied. The C ourt of A ppeal held that an indem nity w ill generally be im plied only in
tim e charters. But the Court o f A ppeal held that this is n o t an inflexible rule and that in
some situations an indem nity may be im plied into a voyage charter, depending on the
width of selection granted to the charterer as regards ports and/or cargoes. H ow ever, this
flexibility is only achieved at the expense of certainty. Take, for instance, a voyage or trip
charter which gives a lim ited right to the charterer to select the ports or the cargoes. Would
four ports (or cargoes) be enough to justify the im plied indem nity but not three?
In conclusion, the C ourt o f A ppeal’s clarification o f the test to be applied with
indem nity claim s is to be w elcomed. H ow ever, that test is still fraught with uncertainty.
O ne possible undesirable outcom e o f the decision, particularly as regards the im plication
o f an indemnity, is to confuse the process o f claim s apportionm ent under charterparties by
encouraging shipow ners to m ake indem nity-based claim s in respect o f cargo dam age
when they are unable to establish fault on the part o f the charterer.

Sim on Baughen*

* Lect urer in Law, University of Bristol.

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